LM001 - What was the impact of the LSE outage on Thurs 26th Nov 2009?

Welcome to the LiquidMetrix short article series! Over the coming months, we will
be publishing a series of short articles drilling down into more detail into our
data sets and highlighting some of our findings. We are going to start with a recent
and topical subject, namely what happened to MTF activity during the LSE outage
on November 26th.

Background

First a little background. The LSE identified connectivity issues with some clients
around 9:30 in the morning of the 26th. This ultimately led to the LSE placing all
order books into auction mode at 10:33. The order books stayed in this state until
14:00 when trading was re-started with a standard uncrossing. (LSE also issued an
update at 13:25 informing the market that trading will resume at 14:00). If you
want to see a blow by blow description of the events and timeline, then the LSE
incident report is at
http://www.londonstockexchange.com/global/incident/26november2009-incidentcommunicationsoverview.htm.
This report is helpful as it was what was disseminated to the market during the
day and makes clear at what points in time the ‘market’ was aware of what was happening
and what was going to happen next.

As this is the first article, we’ll briefly describe the data we have and the analysis
we have performed. We have all on book trades and order by order events (entry/modification/deletion
of orders) in the visible order books tick by tick. We use this data to replay order
books over the day and then measure statistics like spreads, depths, best prices
etc. To illustrate this, the two screenshots below show the re-built CHIX order
books for Lloyds at 10:10:00.000 and 11:30:00.000 on the morning of November 26th.

CHIX order book at 10:10:00.000 (spread 6.6BPS)
(click the image to enlarge)

CHIX order book at 11:30:00.000 (spread 34.2BPS)
(click the image to enlarge)

Using these high frequency order book replays we can measure exactly what happens
second by second during the trading day. The statistics we are showing in this article
are based on 1 second samplings of order books that are then aggregated into 30
second intervals for graphing purposes. We are going to show results for a liquid
and fairly competitive stock (Vodafone). We think most of the comments we make apply
fairly generally to most of the more liquid LSE stocks (where there is significant
competition with the MTFs).

Analysis

1. Order Book Messages

We’ll start with the basics, the graph below shows the number of order book messages
(order entries, modification deletes) occurring on each of the competitive venues
(LSE, CHIX, BATS, TRQX, NURO) during the day of the outage. The y-axis shows messages
per 30 second period.

(click the image to enlarge)

The boundaries of the outage (10:33 to 14:00) are seen quite clearly. Order messages
activity on all the MTFs is very quiet during this period although CHIX shows occasional
spikes of higher activity.

2. Order Book Depths

We measure order book depth as being the total value (i.e. price * volume) of all
bids/offers in the public visible order books within x basis points of mid price.
The graphs below show this statistics for 25BPS (near ‘top’ of book volume). We
have excluded LSE as the books were in auction i.e. volumes could not be ‘hit’.

(click the image to enlarge)

Points of interest:

Immediately following the LSE stocks going into auction at 10:33 the amount of liquidity
in the MTF order books all dropped significantly.

Between around 11:30 to 13:30 CHIX and to a lesser extent BATS managed to recover
some liquidity. For Vodafone there was approximately 500,000 EUR of visible orders
within 25BPS of mid prices.

When LSE announced at 13:25 that trading would resume at 14:00, there was another
collapse in book depths on the MTFs up until the point at which LSE started continuous
trading again.

3. Spreads

The graph below shows the ‘At Touch’ spreads for the MTFs during the outage (again
LSE is excluded as the spread during an auction period is meaningless).

(click the image to enlarge)

Spreads clearly became volatile on Neuro and Turquoise; however CHIX and BATS maintained
more reasonable spreads over the outage period. The graph below shows CHIX and BATS
spreads on their own.

(click the image to enlarge)

Although spreads on CHIX and BATS are clearly larger and more volatile than during
normal market conditions, they are not ‘unreasonable’. In particular on CHIX there
are periods of time when the spread is pretty much normal for this stock, although
we know from the liquidity figures that the volumes available are smaller than normal.

As in the case for depths, there is a clear deterioration in spreads on both CHIX
and BATS leading up to LSE restarting trading at 14:00.

4. Trading Volume

The graph below shows the value traded over the outage. Clearly the volume traded
is extremely low compared to ‘normal’ on all MTF venues. This is despite there being
some liquidity and reasonable spreads on CHIX and BATS.

(click the image to enlarge)

EDSP Auctions

As a side note there is a regular mini ‘outage’ similar to November 26th that occurs
on the 3rd Friday of each Trading Month. On that day between 10:10 and 10:15, LSE
puts stocks that have option/future expiries into an auction state for around 5
minutes. The graphs below show the effect of the EDSP auction on spreads, market
depths and value traded for Barclays on the MTFs for Friday 20th November zoomed
in between 10:00 -> 11:00.

1 Contract MTF Spreads during EDSP auction at LSE 25BPS

MTF Liquidity during EDSP auction

MTF value traded during EDSP auction
(click the images to enlarge)

Summary:

Spreads on all the MTFs widen markedly at 10:10 at the beginning of the LSE EDSP
auction, although CHIX maintains a reasonable spread.

Depths on BATS, Turquoise and Neuro drop to virtually zero. Again CHIX maintains
a degree of liquidity, albeit about a third of normal liquidity.

During the 5 minute LSE EDSP auction there is virtually no value traded on all MTFs.

Obviously this is a very different type of ‘outage’ event in that it is known in
advance and by definition prices can be volatile and volumes large due to the fact
that there are derivative expiries happening. However, it’s interesting to see the
basic patterns (CHIX maintain spreads and some liquidity but has minimal or no trading
activity) are similar to what happened on November 26.

However, on the prolonged 26 November LSE outage, it’s clear from our analysis that
matched trade volumes during the outage were a small fraction when compared with
‘normal’ volumes on the MTFs. This is in spite of the fact that some of the MTFs
seem to have at least some liquidity providers willing to quote reasonable spreads
during the outage albeit with smaller volumes and less ‘depth’ in the visible books
as would be usual. This implies that although prices and some liqiudity was available
on the MTF venues during the outage, aggressive orders were not being routed to
hit these available prices. Some think this is due to the LSE being in ‘Auction
Mode’ rather than suspension, auction mode meaning that many Smart Order Routers
would not route orders away from the primary (or at all). BATS provided an update
in their article to largely express this opinion.

The behaviour of the markets during regular EDSP auctions seems to have given a
good forewarning of what would happen on November 26th. It will be interesting to
see if any trading begins to occur on MTFs during these EDSP periods in the coming
months. If SORs were to be adapted to route orders even if a primary venue is in
auction mode this might start to happen.

Further Thoughts…

Something we haven’t looked at in detail here but may come back to is to what extent
‘price formation’ was continuing on the MTFs. In other words were prices really
‘moving’ in the usual way during the outage or were the market is a kind of limbo
awaiting the re-opening of the primary market.

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